Things To Watch Out For When Buying a Franchise

Red flags to watch out for when buying a franchise business in the UK, and how you can get support when buying a franchise.

Things to watch out for when buying a franchise, red flags to look out for

Things To Watch Out For When Buying a Franchise

If you’re looking to fulfil your career ambitions and get into business ownership, franchising is a great way to go about it. Franchising generally has a higher success rate (around 93%) compared to starting up a business alone (79%. These figures are widely recognised and many surveys have shown similar results. But entering business ownership via franchising isn’t without caution, you should thoroughly explore the market and carry out due diligence. There are many benefits of franchising. But there are also things to watch out for when buying a franchise.

Once you’ve made a decision as to which direction you want to take, if you’ve decided to go down the franchising route, this article will hopefully help you.

What is Franchising?

Franchising is a method of business expansion where the franchisor (the intellectual property owner) grants the rights to trade as that business brand to a third party. The franchisor grants the franchisee the rights to use their brand name, business model, and products or services in a specific location. Gaining popularity over the years, there are now over 1,000 franchises trading in the UK.

Understanding the concept of franchising is crucial for aspiring entrepreneurs looking to establish their own businesses. Franchising provides a range of benefits for both franchisors and franchisees. For franchisees, it offers a turnkey business solution, including initial training and ongoing support. They can leverage an established brand name and tap into a proven business model, which reduces the risks associated with starting a new venture.

On the other hand, franchisors benefit from expanding their business without incurring the costs of opening new locations themselves. Franchising allows them to grow their brand rapidly, using the capital and resources of their franchisees. Additionally, it provides a stream of royalty fees and other revenue from franchisees. However, before diving into the world of franchising, prospective franchisees need to thoroughly understand the terms and conditions outlined in the franchise agreement. They must be aware of the initial investment required, ongoing fees, and restrictions imposed by the franchisor. Conducting proper due diligence and seeking expert advice is essential to ensure that the franchise opportunity aligns with their goals and expectations. In conclusion, understanding the concept of franchising is vital for anyone interested in pursuing entrepreneurial endeavors. It offers a promising avenue for individuals to become successful business owners while benefiting from an established brand and support system. So, if you are thinking about venturing into the world of entrepreneurship, consider exploring the power of franchising.

5 Things to Watch Out For

With the basics of franchising covered, it’s important to realise that not all franchises are perfect business role models. While many brands are well established and look after their franchisees, there are some red flags to look out for. Let’s take a look at these.

1. Many Franchisees Not Renewing Their Agreements or Ceasing Trading

Franchise agreements usually last 5 years, some last longer. For this time, the franchisee is bound by the franchise contract. There will be rules and regulations that need to be followed.

Before purchasing a franchise, you should thoroughly understand the franchise agreement before you sign it. Go over it at least twice, as well with a franchise solicitor and consultant.

Market saturation, poor brand substance and unfavourable reviews can all lead to the downfall of a franchise network. All franchisees play an important role and if a small handful cause problems it can have negative effects on the rest of the franchise.

If a franchise has a suspiciously high turnover rate, it points to underlying problems such as insufficient support, unrealistic expectations, or flawed business models. High attrition could mean that previous franchisees couldn’t make it work, whether due to financial reasons, poor market conditions, or a lack of commitment on the franchisor’s part. This is a major signal that further investigation is required to understand the root cause before you join the ranks of the departed.

2. Lax Franchise Selection Process

With McDonalds franchising, you have numerous interviews, meetings with the board of directors and many assessments you need to pass. You should avoid any franchise that is eager to recruit anyone with the investment to hand. The franchisor’s willingness to take anyone on as a franchisee without a rigorous selection process is concerning. A robust application journey signifies that the franchisor cares about not just getting your fees but also about maintaining the integrity and quality of their brand. A system without screening may lead to a diluted brand image and unhealthy competition among franchisees, ultimately impacting your success. Some franchises will have a stricter recruiting process than others. Regardless, when you express interest in the franchise, the franchisor should too be expressing strong interest in you.

If the franchisor is trying to “sell” you a franchise, this again is a big no-no. The franchisor should be putting no pressure on you to part with any sum of money – whether its a territory reservation deposit or the like – without meeting you first. Make sure you make up some questions to ask before meeting.

3. Negative Franchise Reviews

Check out both the reputation of franchisees and the franchisor / franchise opportunity itself. While most businesses will at some point receive negative reviews, the more there are, the more concerning the business model sounds. Investing in a franchise with negative reviews can be a risky decision. Negative reviews often indicate issues with the business model, customer satisfaction, or management. It’s important to thoroughly research the reasons behind the negative reviews and evaluate if they are isolated incidents or indicative of a broader problem. Consider factors such as the franchise’s reputation, financial stability, support system, and potential for growth. Consulting with a business advisor or franchise expert can provide valuable insights. Ultimately, it’s essential to make an informed decision based on a comprehensive analysis of the franchise’s pros and cons.

Usually a high percentage of customers (ranging from 92% to 95%) read online reviews before making a purchase. This applies to franchises as well. Reading reviews allows you to gather information about the franchise’s performance, support system, customer satisfaction, and overall viability. Remember, reviews should not be the sole basis for your decision, but they can be a useful tool in evaluating a franchise’s potential.

4. Lack of Business Transparency

As part of your franchise exploration process you should be speaking to the franchisor and franchisees. The franchisor should be eager to share information with you within reason, and one of your biggest resources when buying a franchise will be Companies House etc, to check out existing franchisees financial figures for example. Make sure that documentation covers everything you need to know. The franchise agreement is a binding document that can dictate your business decisions for years. If the terms are ambiguous or excessively one-sided in favour of the franchisor, it’s a sign to proceed with caution. Ensure the contract is clear and fair, outlining rights, responsibilities, and dispute resolution procedures. Legal counsel with franchising experience can help you navigate complex agreements and protect your interests.

5. You – Are You Ready?

Finally, don’t overlook your own readiness for the role of a franchisee. Consider your skills, your professional background, and your interests. Are they a good fit with the franchise opportunity you’re considering? Being a successful franchisee often requires a balance of following a proven system while bringing your unique strengths to the table. Take the time to evaluate if the franchise in question matches your aspirations and if you have the necessary drive to succeed in this model.

Evaluating a franchise opportunity thoroughly can help you make an informed decision that aligns with your financial and personal goals. Keep these five areas top of mind as you navigate through potential options, and remember that while franchising offers a roadmap, your due diligence is what will pave the way to your entrepreneurial success.

Remember, a franchise investment is not just a financial transaction but a long-term commitment to a partnership. Take the time to understand the business you’re investing in, and don’t shy away from the necessary steps to protect your investment and your future. The journey into franchising can be an exciting step towards realizing your business dreams, but it should always be a well-informed one. Be attentive, be thorough, and above all, be ready to take command over your own success story.

Conclusion

These are 5 top flags to look out for when buying a franchise. Franchising is a great way to get into business for yourself but not by yourself. Consider exploring the British Franchise Association’s member directory for more information about approved and recognised franchise brands.

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